The New Global Challengers

Transcription

1 The New Global Challengers How 100 Top Companies from Rapidly Developing Economies Are Changing the World BCG REPORT

2 Since its founding in 1963, The Boston Consulting Group has focused on helping clients achieve competitive advantage. Our firm believes that best practices or benchmarks are rarely enough to create lasting value and that positive change requires new insight into economics, markets, and organizational dynamics. We consider every assignment a unique set of opportunities and constraints for which no standard solution will be adequate. BCG has 61 offices in 36 countries and serves companies in all industries and markets. For further information, please visit our Web site at

3 The New Global Challengers How 100 Top Companies from Rapidly Developing Economies Are Changing the World MARCOS AGUIAR ARINDAM BHATTACHARYA THOMAS BRADTKE PASCAL COTTE STEPHAN DERTNIG MICHAEL MEYER DAVID C. MICHAEL HAROLD L. SIRKIN MAY

4 The Boston Consulting Group, Inc All rights reserved. For information or permission to reprint, please contact BCG at: Fax: , attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. Exchange Place Boston, MA USA 2 BCG REPORT

5 Table of Contents A Word from the Authors 4 The New Global Challenge 5 Many Companies on the Move 5 RDEs as Platforms for New Types of Global Competitors 6 The RDE 100 Emerging Global Challengers 7 Where They Come From 8 The Industries They Represent 9 Why They Are Going Global 9 Their Huge Economic Muscle 10 The Shareholder Value They Create 11 How Global They Are Today 11 How the RDE 100 Are Going Global 13 Their Six Strategic Models for Globalization 13 How They Are Growing: Buying and Building 16 Where They Are Growing: Next Door and Around the World 18 The Competitive Strengths and Weaknesses of Emerging Global Challengers 20 Low-Cost Resources 20 Home-Market Environments 21 Operations 21 Innovation 22 Supply Chain Management 22 Going to Market 22 Management Talent 23 Rigorous Strategy and Road Maps 23 Looking Ahead 24 Implications for Challengers 24 Implications for Incumbents 25 Closing Thoughts 26 The New Global Challengers 3

6 A Word from the Authors In our discussions with executives at the world s largest companies, globalization and its challenges are often at the top of the agenda. Invariably, one key question comes up: Which are the new companies based in,, and other rapidly developing economies that I need to know about? Executives recognize that a new class of company is arising in the world today a group of emerging challengers that are becoming important players in both developing and developed markets around the globe. Indeed, many companies based in RDEs are going global fast. As this report highlights, a sample of 100 leading RDE-based companies already have combined annual revenue of $715 billion and are growing at an average rate of 24 percent per year. Companies in this sample are gaining global market share, making major acquisitions, and emerging as important customers, business partners, and competitors for the world s largest companies. The Boston Consulting Group recently assessed the activities and strategies of these newly globalizing companies. We identified and profiled 100 of them, focusing on those with large businesses, significant global activity, an evident commitment to further globalization, and solid prospects for continued success. A global team of senior BCG consultants, based principally in Beijing, Moscow, Mumbai, and São Paulo but also spanning other RDEs, contributed to this effort. We would like to acknowledge particularly valuable contributions to the research and analysis by our colleagues Evgeni Agronik, Jean Chen, Rahul Guha, Vladimir Kim, Xin Liu, and Fernando Machado. We would also like to acknowledge the editorial and production assistance of Barry Adler, Gary Callahan, Kim Friedman, Gina Goldstein, and Kathleen Lancaster. Our analysis of this sample of 100 companies has yielded important insights into the broader trend of RDEbased companies that are expanding globally. This trend is only beginning. Ultimately, its implications will affect every industry and market. We hope that you will find this report interesting and useful. As always, we would be pleased to talk with you about our observations and conclusions. Marcos Aguiar Vice President and Director São Paulo aguiar.marcos@bcg.com Arindam Bhattacharya Vice President and Director New Delhi bhattacharya.arindam@bcg.com Thomas Bradtke Manager Boston bradtke.thomas@bcg.com Pascal Cotte Senior Vice President and Director Paris cotte.pascal@bcg.com Stephan Dertnig Senior Vice President and Director Moscow dertnig.stephan@bcg.com Michael Meyer Consultant Beijing meyer.michael@bcg.com David C. Michael Senior Vice President and Director Beijing michael.david@bcg.com Harold L. Sirkin Senior Vice President and Director Chicago hal.ops@bcg.com 4 BCG REPORT

7 The New Global Challenge A revolution in global business is under way. Companies based in rapidly developing economies (RDEs) such as Brazil,,, and Russia, armed with ambitious leaders, low costs, appealing products or services, and modern facilities and systems, are expanding overseas and will radically transform industries and markets around the world. As this movement unfolds, established incumbent companies will meet the new RDEbased challengers in many arenas: in the competition for supplies, in the search for talent, in the quest for innovation, on the acquisition front, and in markets at home and abroad. Each of these encounters will pose threats but will also offer opportunities for partnering and cooperation. So it will be vital for all companies, regardless of their home location, to understand these developments and take action ahead of them, lest their competitive positions deteriorate. Many Companies on the Move The handful of RDE-based companies that have recently captured media attention prominent examples include the Chinese manufacturers Haier Company and Lenovo Group and the n software houses Infosys Technologies and Wipro represent only a small fraction of a much larger phenomenon. The number of RDE-based companies that are actively expanding beyond their home markets, or planning to, approaches several thousand. Already, RDE-based companies have started assuming leadership positions in lucrative developed markets and have established beachheads in other RDEs. Here are just 15 examples: Bharat Forge () is now the world s secondlargest forging company BYD Company () is the world s largest manufacturer of nickel-cadmium batteries and has a 23 percent share of the market for mobile-handset batteries Established incumbent companies will meet the new RDE-based challengers in many arenas. Cemex (Mexico) has developed into one of the world s largest cement producers International Marine Containers Group Company () has a 50 percent share of the marine container market, supplying the top ten shipping companies globally Chunlan Group Corporation () has a 25 percent share of the Italian air-conditioner market Embraco (Brazil) is the world leader in compressors, with a 25 percent share Embraer (Brazil) has surpassed Bombardier as the market leader in regional jets Galanz Group Company () commands a 45 percent share of the microwave market in Europe and a 25 percent share in the United States Hisense () is the number-one seller of flatpanel TVs in France Johnson Electric () is the world s leading manufacturer of small electric motors Nemak (Mexico) is one of the world s premier suppliers of cylinder head and block castings for the automotive industry Pearl River Piano Group () is the global volume leader in piano manufacturing Ranbaxy Pharmaceuticals () is among the top ten generic-pharmaceutical players in the world Techtronic Industries Company () is now the number-one supplier of power tools to Home Depot in the United States Wipro () has become the world s largest third-party engineering-services company To be sure, not all challengers will be successful. Some may meet the same fate as D Long Group, a Chinese investment company that acquired The New Global Challengers 5

8 Fairchild Dornier, a German aircraft manufacturer, with great fanfare in 2003, only to seek bankruptcy protection a year later. But many others will break through to become established global players. Just as many companies based in South Korea and Japan are now firmly global, so too will today s RDEs produce future global leaders. Indeed, the RDEs themselves possess characteristics that constitute particularly powerful platforms for the creation and development of future global companies. RDEs as Platforms for New Types of Global Competitors Why are we now seeing the emergence of global challengers from RDEs? A variety of fast-moving globalization forces are spurring this trend. These include the Internet, the World Trade Organization, the dramatic surge in low-cost communications technologies, and economic reforms in key RDEs. In addition, the development of RDE markets themselves is a strong enabler for the creation and growth of globally ambitious companies. Once those markets begin developing, many companies realize that they need to move beyond their home markets in order to grow further, create value, and sustain longterm competitiveness. We briefly explore the role of RDE countries as platforms for new global challengers below; later in the report we address the companies own motives for globalization. RDEs have rapidly growing markets, some of which are very large. Markets such as,, and Russia are sufficiently large and fast growing to support large domestic companies. For example, s Huawei Technologies Company, a telecom equipment maker, has achieved domestic sales of more than $3 billion. The rapid growth of RDE markets in general over the past decade means that domestic companies have an opportunity to become quite large on their home turf. RDEs have low-cost resources. All RDEs have an abundance of low-cost basic labor, and most offer other resources at low cost. Domestic companies in these markets are often better than foreign companies at exploiting these low-cost resources. We discuss this issue extensively later in the report. Difficult operating environments in RDEs produce some highly capable companies. The challenges of operating in RDEs include selling profitably to low-income customers, dealing with immature logistics and distribution environments, navigating ambiguous legal environments, handling rapid external change, and managing despite shortages of management talent. A company that has addressed these issues in its home market will have an advantage when seeking to grow in similar markets abroad. Such companies may also have developed the ability to innovate quickly and to make very rapid decisions skills that are essential to capturing fast-moving opportunities. RDEs are training grounds for competing with global incumbents. Increasingly, RDEs are key markets for multinational companies (MNCs) that are the incumbent leaders in developed-country markets. RDE-based companies have the opportunity to learn from these competitors in their midst. Consumer electronics companies such as Hisense and TCL Corporation in, for example, compete aggressively in their home markets against global incumbents Matsushita, Philips, Samsung, and Sony. Despite providing all these advantages, RDE markets in themselves do not allow companies to attain global scale, no matter how big or fast growing they are. Ultimately, many RDE-based companies find that they must seek opportunities abroad. We will discuss this point further. 6 BCG REPORT

9 The RDE 100 Emerging Global Challengers To better assess the globalization strategies of RDEbased companies, we have identified 100 large RDEbased companies that, in our opinion, are at the leading edge of globalizing their businesses. Having identified this group of companies, we then looked at their similarities, differences, and globalization patterns and derived some interesting implications from this analysis. Our list of 100 emerging global challengers comprises a diverse group of companies based in ten RDE countries. (See Exhibit 1.) We EXHIBIT 1 THE RDE 100 SPAN MULTIPLE INDUSTRIES AND COUNTRIES Company Aluminum Corporation of (Chalco) América Móvil Bajaj Auto Bharat Forge BOE Technology Group Company Braskem BYD Company Cemex Charoen Pokphand Foods Aviation Corporation FAW Group Corporation HuaNeng Group International Marine Containers Group Company (CIMC) Minmetals Corporation Mobile Communications Corporation National Heavy Duty Truck Group Corporation (CNHTC) Netcom Group Corporation (CNC) Petroleum & Chemical Corporation (Sinopec) Shipping Group Chunlan Group Corporation Cipla CNOOC Companhia Vale do Rio Doce (CVRD) COSCO Group Coteminas Crompton Greaves Dongfeng Motor Company Dr. Reddy s Laboratories Embraco Embraer Erdos Group Femsa Founder Group Galanz Group Company Gazprom Gerdau Steel Gree Electric Appliances Gruma Grupo Modelo Haier Company Hindalco Industries Hisense Huawei Technologies Company Indofood Sukses Makmur Infosys Technologies Johnson Electric Koç Holding Konka Group Company Larsen & Toubro Lenovo Group Li & Fung Group Industry Nonferrous metals Telecommunications services Automotive equipment Automotive equipment Computers and IT components Petrochemicals Consumer electronics Building materials Food and beverages Aerospace Automotive equipment Fossil fuels Shipping Nonferrous metals Telecommunications services Automotive equipment Telecommunications services Fossil fuels Shipping Home appliances Pharmaceuticals Fossil fuels Mining Shipping Textiles Engineered products Automotive equipment Pharmaceuticals Engineered products Aerospace Textiles Food and beverages Computers and IT components Home appliances Fossil fuels Steel Home appliances Food and beverages Food and beverages Home appliances Nonferrous metals Consumer electronics Telecommunications equipment Food and beverages IT services/business process outsourcing Engineered products Home appliances Consumer electronics Engineering services Computers and IT components Textiles Country Mexico Brazil Mexico Thailand Brazil Brazil Brazil Brazil Mexico Russia Brazil Mexico Mexico Indonesia (Hong Kong) Turkey (Hong Kong) Company Lukoil Mahindra & Mahindra Malaysia International Shipping Company (MISC) Midea Holding Company MMC Norilsk Nickel Group Mobile TeleSystems (MTS) Nanjing Automobile Group Corporation (NAC) Natura Nemak Oil and Natural Gas Corporation (ONGC) Orascom Telecom Holding Pearl River Piano Group Perdigão Petro Company Petrobrás Petronas Ranbaxy Pharmaceuticals Reliance Group Rusal Sabanci Holding Sadia Satyam Computer Services Severstal Shanghai Automotive Industry Corporation Group (SAIC) Shanghai Baosteel Group Corporation Shougang Group Sinochem Corporation Sisecam Skyworth Multimedia International Company Sukhoi Company SVA Group Company Tata Consultancy Services (TCS) Tata Motors Tata Steel Tata Tea TCL Corporation Techtronic Industries Company Thai Union Frozen Products Tsingtao Brewery TVS Motor Company UTStarcom Vestel Group Videocon Industries Videsh Sanchar Nigam (VSNL) Votorantim Group Wanxiang Group Corporation WEG Wipro ZTE Corporation Industry Fossil fuels Automotive equipment Shipping Home appliances Nonferrous metals Telecommunications services Automotive equipment Cosmetics Automotive equipment Fossil fuels Telecommunications services Musical instruments Food and beverages Fossil fuels Fossil fuels Fossil fuels Pharmaceuticals Chemicals Nonferrous metals Chemicals Food and beverages IT services/business process outsourcing Steel Automotive equipment Steel Steel Chemicals Building materials Consumer electronics Aerospace Consumer electronics IT services/business process outsourcing Automotive equipment Steel Food and beverages Consumer electronics Engineered products Food and beverages Food and beverages Automotive equipment Telecommunications equipment Consumer electronics Consumer electronics Telecommunications services Process industries Automotive equipment Engineered products IT services/business process outsourcing Telecommunications equipment Country Russia Malaysia Russia Russia Brazil Mexico Egypt Brazil Brazil Malaysia Russia Turkey Brazil Russia Turkey Russia (Hong Kong) Thailand Turkey Brazil Brazil SOURCES: BCG RDE Challengers Database; BCG analysis. The New Global Challengers 7

10 identified these companies from a pool of more than 3,000 candidates by screening primarily for size, extent of overseas revenue, and prospects for further expansion. (For details, see the sidebar below.) Although these companies employ different strategies and are at different stages of globalization, they share a strong ambition to grow globally. They also share a set of compelling competitive advantages that they are leveraging in various ways to pursue global growth. Where They Come From Asia is home to the large majority 70 of our RDE 100 companies, followed by Latin America with 18. Another 12 are based in Egypt, Russia, and Turkey. is by far the dominant home-base country, with 44 of the RDE 100, followed by with 21 and Brazil with 12. (See Exhibit 2.) Relative to the current size of their national economies, and are disproportionately represented on the list. s share of the total GDP of the 100 RDE countries is 29 percent, but Chinese companies account for 44 percent of the companies on our list; for, the numbers are 13 percent and 21 percent, respectively. At the other extreme, Russia and Indonesia are greatly underrepresented. Among the RDEs studied, and in particular have already produced an impressive set of METHODOLOGY FOR SELECTING THE RDE 100 The RDE 100 list was generated through a detailed screening process. We began with more than 3,000 companies based in 12 major RDEs, which we had selected on the basis of the size of their economies (GDP), the value of their exports, and the amount of their foreign direct investments. Our list of RDEs comprised Brazil,, the Czech Republic, Hungary,, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand, and Turkey. The initial master list of candidate companies was compiled on the basis of rankings of the largest companies in each of the selected countries, such as the top 500 companies in selected by Businessworld, the leading n business magazine, and the top 500 companies in Brazil selected by Exame, the leading Brazilian business magazine. An international BCG research team consisting of business analysts and economists from Brazil,,, Mexico, and Russia, and a panel of senior BCG experts in Asia, Europe, and the United States then conducted a rigorous four-step triage. In step one, we ensured that only truly RDE-based companies were selected, omitting foreign joint ventures and RDE subsidiaries of multinational corporations. In step two, we homed in on those players with annual revenue of at least $1 billion (as of 2004), a threshold we believe is necessary to drive a serious globalization campaign. In step three, we eliminated players whose current international business presence amounted to less than 10 percent of revenue (we made an exception for companies that were close to 10 percent and whose international business activity had grown swiftly in the recent past). In step four, we scored the major globalization credentials of those companies that had passed all three previous thresholds. The scoring was based on five criteria: the international presence of the company as indicated by its owned and operated subsidiaries, sales networks, manufacturing facilities, and R&D centers; the major international investments it had pursued in the past five years, including mergers and acquisitions (M&A); its access to capital for financing international expansion, whether through free cash flows, stock markets, or other sources; the breadth and depth of its technologies and its intellectual-property portfolio; and the international appeal of its existing offerings and value propositions. This analytically rigorous approach generated a list of 80 companies that fully met our criteria. Twenty companies that did not pass the $1 billion minimum-revenue hurdle are nonetheless included among our RDE 100 because they have created unique globalization capabilities or business models. From the original list of 12 countries, no companies from the Czech Republic, Hungary, or Poland made it through the screening, primarily because the larger globalizing companies in these countries are actually subsidiaries of foreign multinationals. We also included a company from Egypt in the final list, although Egypt was not among the markets in our initial screening. 8 BCG REPORT

11 companies with strong global ambitions. Where the globalizing Chinese companies differ dramatically from the globalizing n companies is in their ownership structures. More than two-thirds of the Chinese companies among the RDE 100 are state owned or state controlled, often with publicly traded subsidiaries or with minority stakes in the hands of strategic investors (both domestic and foreign). Of the remaining companies, some have a mixed-ownership structure but only four Chinese companies on the list are privately owned (and these include one company actually domiciled in Hong Kong). The shares of n companies are usually divided among private owners, strategic investors, and the EXHIBIT 2 THE RDE 100 REPRESENT A VARIETY OF COUNTRIES AND INDUSTRIES Other (10) 1 Mexico (6) Russia (7) Brazil (12) (21) (44) RDE 100 by geography Other (18) Technology equipment (6) Food and cosmetics (11) Resource extraction (15) Consumer durables (18) Industrial goods (32) RDE 100 by industry SOURCES: BCG RDE Challengers Database; BCG analysis. Including Telecommunications services (6) IT services/business process outsourcing (4) Including Fossil fuels (9) Nonferrous metals (5) Including Home appliances (6) Consumer electronics (8) Including Automotive equipment (12) Steel (5) Engineered products (5) 1 These companies are located in Egypt, Indonesia, Malaysia, Thailand, and Turkey. general public, with no single investor possessing a majority stake. All the n companies on our list are publicly traded and all have foreign strategic investors as stockholders. Only one n company on the list is state controlled. Companies from other countries display a wide range of ownership patterns. In some countries, such as Mexico, strategic investors play an important role while in others, such as Turkey, the families of the founders still exert control. The Industries They Represent The RDE 100 are active in a wide range of industries. The largest is industrial goods, which includes 32 companies active in the automotive equipment sector, basic materials, and various engineered products. The second-largest group is consumer durables, comprising 18 companies involved mainly in household appliances and consumer electronics. Resource extraction is the third-largest cluster, with 15 players. Food-and-beverage and cosmetics companies come in fourth, with 11 players, and technology equipment companies fall into fifth place, with 6. The remaining 18 companies represent a broad spectrum of industries ranging from pharmaceuticals and mobile-communications services to shipping and infrastructure. When we view the industry distribution of the RDE 100 together with their geographic distribution, certain clusters of regional capabilities emerge. (See Exhibit 3, page 10.) possesses the most diverse set of emerging global challengers. Chinese companies are well represented in consumer electronics, household appliances, telecommunications and IT equipment, and automotive equipment manufacturing. is well represented in automotive equipment manufacturing, IT services, and pharmaceuticals, especially generic drugs. Most other countries have large domestic players in only one or two clusters, as well as perhaps a few individual challengers in other sectors. Examples include raw-material extraction in Russia, household appliances in Turkey, and food processing in Thailand. Why They Are Going Global For RDE-based companies, the decision to globalize is ultimately driven by the need to create sustain- The New Global Challengers 9

12 EXHIBIT 3 MANY OF THE RDE 100 FALL INTO REGIONAL COMPETENCE CLUSTERS Turkey Home appliances (2) Russia Fossil fuels (2) Steel and nonferrous metals (3) Mexico Food and beverages (3) Consumer electronics (6) Home appliances (5) Automotive equipment (6) Telecommunications equipment (3) Computers and IT components (3) Brazil Food and beverages (2) Engineered products (2) Automotive equipment (5) IT services/business process outsourcing (4) Pharmaceuticals (3) Southeast Asia Food and beverages (3) SOURCES: BCG RDE Challengers Database; BCG analysis. able advantage and shareholder value. International opportunities can provide a strong platform for shareholder value creation. Our research indicates that for 88 of the RDE 100 companies, the key motive for globalization is gaining access to new profit pools. Overseas markets may bring RDEbased companies higher margins and revenue, as well as higher volumes (which contribute to scale economies) and opportunities for growth-enhancing acquisitions. For the remaining 12 of our RDE 100 companies, such as s CNOOC (fossil fuels), globalization is driven by the need to secure long-term access to raw materials. The underlying motives may be both nationalistic and related to shareholder value. These companies are less likely to compete for overseas customers and instead will challenge developed-market companies for access to supply and for M&A opportunities. Their Huge Economic Muscle In aggregate, the RDE 100 accounted for $715 billion in revenue in 2004 similar to the 2004 GDP of the entire national economies of Mexico and Russia. Already, 28 percent of the group s collective revenue, or $200 billion, comes from international sales. Among other impressive statistics: The RDE 100 grew at a rate of 24 percent per year from 2000 through 2004, ten times as fast as the GDP of the United States, 24 times that of Japan, and 34 times that of Germany. They earned $145 billion in operating profits, equivalent to a margin of 20 percent over sales, compared with 16 percent for the United States S&P 500 companies, 10 percent for Japan s Nikkei companies, and 9 percent for Germany s DAX companies. In 2004 their collective portfolio contained $520 billion in net fixed assets, which is more than those of the world s top 20 automobile manufacturers combined. That year the RDE 100 invested around $110 billion. They employed 4.6 million people and had a collective payroll of approximately $20 billion. And they purchased an estimated $190 billion to $200 billion in raw materials and energy, $50 billion to $60 billion in parts and components, and $40 billion to $50 billion in services such as third-party IT and engineering, shipping, and logistics. The RDE 100 spent $9 billion on R&D in 2004, equivalent to 1.3 percent of sales, to support the work of their 250,000 to 300,000 engineers and scientists. On the acquisition front, the RDE 100 completed 200 publicly announced international transac- 10 BCG REPORT

13 tions between 2001 and That number does not take into consideration the sizable number of acquisitions in individual companies domestic markets, which further strengthened these companies platforms for launching global growth. The Shareholder Value They Create Sixty of BCG s RDE 100 are public companies or have subsidiaries that are publicly traded in major international capital markets. The total market capitalization of these entities is $680 billion (as of March 2006). These companies collective stock performance has been impressive. From January 2000 to March 2006, their total shareholder return (TSR) increased by more than 150 percent, while the TSR of companies listed in Morgan Stanley s Emerging Market Index rose by 100 percent and that of the S&P 500 companies declined slightly. (See Exhibit 4.) How Global They Are Today As a group, the companies in the RDE 100 already represent a formidable force in the global economy. Given their growth rates, most will continue to gain strength in the coming years. The picture becomes more complicated, however, when we look at individual companies. Whereas some of the RDE 100 players have established themselves firmly in the global marketplace, others are rapidly doing so now, and others are still in the early experimentation phase. In terms of the maturity of their globalization drive, our RDE 100 can be divided into three groups: the early movers, the fast followers, and the up-and-comers. The Early Movers. At the top is a relatively small group of ten players that started to globalize early and have gained global leadership positions in their industries. Mexico s Cemex, for example, has grown through a series of international acquisitions to become one of the largest cement producers in the world. The company has consistently generated superior returns compared with its international competitors and has developed unique capabilities in the form of a highly scalable operating model, a serial acquisitions approach, and a global logistics EXHIBIT 4 THE RDE 100 CREATE SHAREHOLDER VALUE Total shareholder return index, December 31, 1999, to March 8, 2006 TSR index (December 31, 1999=100) 300 TSR index as of March 8, 2006 Change since December 31,1999 (%) 250 RDE challengers Emerging markets S&P (7.0) 50 December 31, 1999 March 8, 2006 SOURCES: Datastream; BCG analysis. NOTE: The TSR index of RDE challengers is based on the TSR of 60 RDE companies or their subsidiaries listed in Hong Kong, London, Mumbai, New Delhi, and New York; the TSR of emerging markets is based on Morgan Stanley s Emerging Market Index. The New Global Challengers 11

14 system. Other companies in this category include $1.1 billion Johnson Electric, the world leader in small electric motors, with more than 40 percent market share. Headquartered in Hong Kong, this company is building its advantage with a strong Chinese operating base. Also well established globally is Brazil s Embraco, the $800 million world leader in compressors, with a 25 percent global market share. The Fast Followers. The next group of companies, 46 of the 100, are currently making rapid progress in their globalization, building on significant initial experiences. Companies in this group include s Haier Company (household appliances); s Infosys Technologies (IT services and business process outsourcing); s Bharat Forge (automotive equipment); and Turkey s Koç Holding (household appliances). These companies have ambitious globalization plans and a critical mass of international business in their portfolios. They have already signaled their global ambitions to the investment community. Other players in this group include the large RDE resource conglomerates seeking either access to new raw-material sources, such as s CNOOC, or access to downstream markets, such as Russia s Lukoil, which demonstrated its intentions by acquiring parts of the Getty gas-station network in the United States. While these companies have already received significant public attention, others have so far kept a relatively low international profile. These less wellknown players include, for example, s Pearl River (pianos), s Hisense (consumer electronics), Mexico s Nemak (automotive equipment), and Turkey s Vestel Group (consumer electronics). The Up-and-Comers. The last group consists of 44 companies. These are players that are at an early stage of globalization or whose ambitions have, until recently, been more regional than global. Companies in this category include s Tata Motors (automobiles), Egypt s Orascom Telecom Holding (telecommunications services), Turkey s Şişecam (glass), and Brazil s Braskem (petrochemicals). Spanning a wide range of industries and home countries, this group includes many companies that merit careful watching in the future. Regardless of where in the globalization process each of our 100 companies stands, all of them share the ambition to become truly global players. In pursuit of this goal, they are devising and deploying a variety of strategic models. 12 BCG REPORT

15 How the RDE 100 Are Going Global The companies on our RDE 100 list are pursuing globalization in their own unique ways. They are also truly operating all over the map. But certain patterns are discernible in their actions to date. Their Six Strategic Models for Globalization Each company s overall approach tends to follow one of six primary globalization strategies: Model 1: Taking RDE brands global Model 2: Turning RDE engineering into global innovation Model 3: Assuming global category leadership Model 4: Monetizing RDE natural resources Model 5: Rolling out new business models to multiple markets Model 6: Acquiring natural resources We should note that these six strategies, while distinct, often overlap in practice. Moreover, they have certain aspects in common. All of them build on low cost positions a key competitive advantage of RDEs. And virtually all the companies are voracious when it comes to learning and adapting. This skill gives them the advantage of being able to learn from other, more established companies, as well as from their own bold, entrepreneurial experience and willingness to adapt to changing market conditions. We discuss the six globalization models below. Model 1: Taking RDE Brands Global. Twenty-eight of our RDE 100 are growing internationally by taking their established home-market product lines and brands to global markets. A representative company employing this strategy is s Hisense, a $3.3 billion consumer-electronics group. The company is one of s premier manufacturers of TV sets (it has an 11 percent share of the domestic market), air conditioners, PCs, and telecom equipment. In addition to manufacturing in, Hisense has production sites in Algeria, Hungary, Iran, Pakistan, and South Africa. The company has expanded mainly through organic growth and is now selling 10 million TV sets and 3 million air conditioners each year in more than 40 countries. International sales account for $490 million, or 15 percent, of total revenue. Hisense has the best-selling brand of flat-panel TV sets in France, where its products are being distributed through major retail chains such as Carrefour. Hisense s success to date is based on its stylish consumer products, which provide very good value for an affordable price. The company brings to the international marketplace a continuous stream of new products developed by its world-class R&D center, which is located in one of the world s fastest-moving and most demanding consumer-electronics markets itself. The domestic market also gives Hisense a superscale, low-cost manufacturing base, allowing it to leverage a network of low-cost component suppliers and specialized assembly crews. In addition, Hisense is getting a jump-start by building on experience gained through joint ventures and alliances with global players such as Hewlett- Packard, IBM, and Panasonic. Companies in this category build international momentum on the basis of home-market products that have broad global appeal or are easy to customize for new markets. In developed-country target markets, these companies often position their products as good-value-for-the-money alternatives to established brands. That positioning now encompasses a sizable and rapidly growing segment, propelled by large discount retailers such as Wal-Mart. The 28 RDE 100 companies pursuing this strategy deal primarily in consumer electronics and household appliances, as well as automotive equipment, specialty foods, and beverages. These companies had $138 billion in combined 2004 revenue, of which 19 percent, or $26 billion, came from abroad. Their average annual growth rate from 2000 through 2004 was 24 percent. A particularly large number of players in this category (18) are in. Model 2: Turning RDE Engineering into Global Innovation. Twenty-two of the RDE 100 companies are growing internationally by marketing innovative technology-based solutions that leverage their strengths in engineering and research. A representa- The New Global Challengers 13

16 tive example is Wipro, the n IT-services group. Wipro has expanded rapidly by providing softwarecoding support. As offshored IT services and business process outsourcing have flourished, the company has grown quickly, from $545 million in revenue in 2000 to $1.8 billion in Whereas Wipro s value proposition at first focused mainly on cost, the company now creates much of its value by completely redesigning its clients business processes, a task requiring comprehensive processinnovation capabilities. Furthermore, Wipro is taking innovation to the next level by building extensive engineering capabilities, thus making R&D services the next battleground. The company already claims to be the world s largest third-party provider of R&D services. Its 12,000-strong Product Engineering Services (PES) group offers a complete range of R&D services from product strategy to hardware design to quality consulting to clients that sell electronics-based products. With more than 120 active clients in industries such as semiconductors, automotive products, platforms and peripherals, consumer electronics, and medical devices, PES has seen its revenue grow at a rate of 36 percent per year from 2003 through The group already accounts for 36 percent of Wipro s total revenue. Innovation-based globalization will require RDEbased players to mobilize engineering and science talent in areas in which they can create sizable and sustainable advantage over their counterparts in developed markets. In many domains, the RDE talent pool is deep and growing quickly, and RDE players are at an advantage when it comes to monetizing that pool relative to MNCs that are setting up RDEbased R&D centers. In a ranking by university students in, for example, s Huawei Technologies Company was rated as a more attractive employer than any of its MNC competitors. The 22 RDE 100 companies that are pursuing innovation-based globalization strategies are active in telecommunications equipment, aerospace, automotive equipment, pharmaceuticals, and technology services. They had $56 billion in combined 2004 revenue, of which they earned 39 percent, or $22 billion, abroad. Average annual growth from 2000 In many domains, the RDE talent pool is deep and growing quickly. through 2004 was 33 percent. A large number of players in this category 11 are based in. Model 3: Assuming Global Category Leadership. Twelve of the RDE 100 are growing internationally by establishing themselves as specialists and global leaders in one specific, relatively narrow product category. For example, Hong Kong s Johnson Electric had $1.1 billion in revenue in 2004 (67 percent from outside Asia) and is the global market leader in small electric motors for automotive, consumer, and various commercial applications. The company can produce 3 million motors daily in its superscale operations in alone. These operations are complemented by several other manufacturing sites in Latin America, the United States, and Western Europe, and by R&D centers in Israel, Italy, Japan, and the United States. While Johnson Electric puts a strong emphasis on aggressive organic growth, it has also pursued multiple acquisitions in the United States to absorb the inhouse production of tier one suppliers that it can handle more efficiently. Such acquisitions have included some of the electric-motor assets of ArvinMeritor, Kautex Textron, and Lear. In parallel, the company is using acquisitions to broaden its capability base and move into more specialized product lines, such as precision piezoceramic motors (through the purchase of Israel s Nanomotion) and digital-camera motors (through the purchase of Japan s Nihon Mini Motor). Johnson Electric makes broad use of s advantages, leveraging superscale manufacturing and material sourcing to achieve an extremely high degree of specialization, very high volumes, and very low global unit costs. The company also employs sophisticated global supply-chain management to meet the standards of automotive OEMs and leading commercial brands worldwide. The company s quest for scale is helped by global OEMs trend toward outsourced motor production and by global companies enthusiasm for as a preferred source of manufactured products. Johnson Electric also leverages highly specialized and customercentric R&D in and throughout the world, allowing it to become a motion subsystems innovator as well as a leading motor supplier. 14 BCG REPORT

17 Companies in this category have in common a relatively well-defined target market for their products; considerable depth in their chosen niches (which in some instances amounts to global category leadership); superscale manufacturing; highly focused R&D; and global logistics, which they have down to a science. Their specialization allows them to be best in class, ahead of the competition on cost, innovation, and the understanding of next-generation customer needs. It also provides them with a scalable platform from which to drive global industry consolidation and also to add on new, related niches. The 12 of our RDE 100 companies pursuing category leadership are involved mainly in discretely manufactured industrial products: motors (such as Johnson Electric), compressors (such as Brazil s Embraco), power tools (such as s Techtronic), and shipping containers (such as International Marine Containers Group Company). These companies had $36 billion in combined 2004 revenue, of which they earned 61 percent, or $22 billion, abroad. Their average annual growth from 2000 through 2004 was 23 percent. A particularly large number of RDE players in this category are based in Brazil and. Model 4: Monetizing RDE Natural Resources. Thirteen of the RDE 100 are growing internationally by marketing products that leverage their home countries natural-resource advantages. Prime examples are the Brazilian food processors Sadia and Perdigão, with annual revenue of $2.2 billion and $1.8 billion, respectively, of which nearly half comes from exports to more than 100 countries. Both companies hold 30 to 50 percent shares of the Brazilian market in their main product lines. Both operate along the entire value chain, from farming to marketing chilled and frozen foods and highvalue-added products such as ready-to-eat meals. Sadia does business with 12,500 soy and corn producers and 10,200 integrated farmers. The company has 9 industrial units and 8 distribution centers in Brazil, and 11 sales offices around the world. Perdigão has 16 industrial units and 16 distribution centers in Brazil, as well as 7 sales offices in Europe, the Middle East, and the Far East. Both companies expansion models focus on growing their domestic production capacity while investing in overseas supply-chain-management capabilities. Perdigão s Rio Verde Agro industrial complex is now Latin America s largest slaughterhouse, and the company s total exports average 60,000 tons per month. Sadia s total exports reached 1 million tons in 2005, an increase of more than 16 percent over In 2005 both companies expanded their export-focused facilities: Perdigão opened a 400-ton-per-month processing facility in Brasilia, while Sadia opened a large distribution center in Ponta Grossa and bought Sofrango, a major poultry producer in Brasilia. The two companies key competitive advantage lies in abundant production resources for pork, poultry, and grain, which are complemented by ideal growing conditions for animal feed and by low labor costs. Both have hatcheries that are among the most productive in the world, achieving low production costs and high yields with the highest quality standards. And both pride themselves on their state-of-the-art global distribution and supplychain-management systems. Companies in this category build their global expansion on natural resources that are low cost by international standards, with no compromise in quality. This advantage stems from an abundance of energy, minerals, agricultural feedstock, or a combination of those resources. The companies in our selection that take this approach are active in fossil fuels, mining and metals, and agricultural products. Brazil s Companhia Vale do Rio Doce (CVRD), for example, builds its global advantage and growth on rich, lowcost iron-ore reserves. In addition to leveraging abundant natural resources, players in this group have generally developed superior operating models for their industries. The 13 companies pursuing this model had $110 billion in combined 2004 revenue, of which they earned 66 percent, or $73 billion, abroad. Their average annual growth from 2000 through 2004 was 26 percent. Almost all the companies in this category are based in Brazil or Russia. Model 5: Rolling Out New Business Models to Multiple Markets. Thirteen of our RDE 100 are building regional or global portfolios in their respective industries by rolling out business models that they have generally pioneered in their home markets. These companies had $93 billion in combined 2004 revenue, including 29 percent, or $27 billion, earned abroad. Their average annual growth from 2000 through 2004 was 28 percent. The New Global Challengers 15

18 Representative of this strategy is Cemex, the $15.3 billion Mexican cement conglomerate. One of the largest ready-mix-concrete companies in the world, Cemex is vertically integrated, with more than 50,000 employees in more than 50 countries. Cemex generates $12.1 billion, or 79 percent, of its revenue abroad. It has built a truly global presence through acquisitions in the Americas (Colombia, Dominica, Panama, Puerto Rico and other parts of the United States, and Venezuela), Asia-Pacific (Bangladesh, Indonesia, the Philippines, and Thailand), the Middle East (Egypt), and Europe, topped off by the 2005 purchase of the U.K.-based cement giant RMC Group. The key to Cemex s success lies in its rigorous approach to integrating and running acquisitions, part of the Cemex way. This formula is based on a global capability platform that covers every aspect of the business, including plant management, supply chain management, distributor management, and end-customer service. Integral to the approach is a seasoned M&A and postmerger-integration team that can execute serial acquisitions. A number of companies in this category are still in the early stages of globalization. Contenders represent a variety of industries besides cement, including chemicals, food products, and telecommunications services. These companies tend to expand in one of three ways. Like Cemex, they may have a comprehensive formula for acquisitions, markets, and operational excellence. Or they may operate in a manner that creates superiority along a critical dimension, such as the way that Thailand s Charoen Pokphand Foods approaches operational efficiency in agricultural production through technology and scale. Finally, they may exploit advantages such as cultural similarities, shared language, or political ties that provide privileged access to a market as, for example, Orascom Telecom does, using its Egyptian home base to expand into the neighboring region. The key to Cemex s success lies in its rigorous approach to integrating and running acquisitions. in 1978 and still state owned, Baosteel has a production capacity of approximately 20 million tons of crude steel a year, half as much as Luxembourg s Arcelor and about 20 percent more than Germany s ThyssenKrupp. Baosteel s combination of state-of-the-art technology, the lowest cost base in Asia, and strong operational capabilities has translated into operating profit margins well above the industry average. More than 98 percent of its revenue comes from, the world s fastest-growing steel market. Baosteel is well positioned to capitalize on this growth, given its domestic market share of about 50 percent in the automotive and household appliances segments. To date, Baosteel s international expansion has aimed at securing stable iron-ore supplies. To that end, it acquired a 50 percent interest in CVRD s Água Limpa iron-mining complex in Brazil in 2001 and one year later invested in a joint venture with Hamersley Iron, an Australian subsidiary of Rio Tinto Group. The joint venture will supply Baosteel with more than 20 million tons of iron ore annually. The companies in this category are active in either fossil fuels or metal and mining products. Nine of the 12 are based in, which consumes far more oil, gas, and iron ore than it produces. Irrespective of their countries of origin, these companies typically enjoy solid government backing for their attempts to acquire assets abroad. Following the buildup of overcapacity in some sectors (steel in, for one) and a further upgrade in their operational capabilities, some of these companies will likely compete in global product markets. The companies pursuing this model had $282 billion in combined 2004 revenue, including only $30 billion, or a little more than 10 percent, earned abroad. Their average annual growth from 2000 through 2004 was 25 percent. Model 6: Acquiring Natural Resources. In contrast to most emerging challengers, 12 of our RDE 100 companies are expanding overseas not to tap new profit pools but to acquire vital raw materials for their home markets. A good example is Shanghai Baosteel Group Corporation, s biggest steel maker, which had revenue of $19.5 billion in Founded How They Are Growing: Buying and Building Although much public attention focuses on the multibillion-dollar acquisitions of a handful of RDE-based companies, these transactions account for less than 20 percent of the international 16 BCG REPORT

19 growth of the RDE 100. These companies have achieved more than 80 percent of their growth organically, either by exporting from their homecountry bases or by establishing international operations, in some cases through joint ventures. Only 24 of the companies on our list conducted more than three M&A deals between 1988 and 2005, while 27 companies conducted no deals at all. That being said, we need to make two important qualifications. First, acquisitions form an integral part of international expansion in some globalization models. For instance, they are very important for companies rolling out their business models to other regions. América Móvil, a Mexican provider of telecommunications services, spent more than $5 billion to conduct 15 acquisitions, from 2001 through 2005, intended to build up its presence across Latin America. Raw-material companies have employed similar strategies, particularly to secure access to vital supplies. At the other extreme, companies taking their home-market brands global have seldom pursued M&A. (See Exhibit 5.) Second, the M&A activities of the RDE 100 are on the rise. Whereas in 2000 they recorded only 15 acquisitions, in 2004 the number rose to 40, and in 2005 to 59. (See Exhibit 6, page 18.) Most of these deals are small, with specific objectives. They usually help an RDE-based company establish a commercial beachhead through existing brands, distribution channels, and local management. In addition, many RDE-based companies, such as s Bharat Forge (automotive equipment), have used M&A activities to obtain immediate access to vital technologies. Some RDE players have bought underperforming incumbents or dormant brands with the aim of turning them around. An example is Techtronic s formation of a strong power-tool portfolio combining brands such as AEG, Atlas Copco, Dirt Devil, and Ryobi EXHIBIT 5 RDE COMPANIES APPROACH TO EXPANSION IS RELATED TO THE GLOBALIZATION MODEL USED Primary approach to global expansion M&A Partnerships Organic growth Globalization models Percentage of companies pursuing each approach to growth, by globalization model Taking brands global Turning engineering into innovation Assuming category leadership Monetizing natural resources Rolling out new business models Acquiring natural resources SOURCES: BCG RDE Challengers Database; BCG analysis. The New Global Challengers 17

20 EXHIBIT 6 OUTBOUND M&A ACTIVITIES OF THE RDE 100 ARE GROWING Number of deals SOURCE: BCG RDE Challengers Database. with superscale, low-cost Chinese manufacturing and leading-edge R&D capabilities. The company is now the category leader at Home Depot, the world s largest do-it-yourself chain, and it has won several awards for product quality and innovation. Looking ahead, we expect acquisitions to play a more important role. The desire of RDE players to grow will likely exceed their ability to develop the necessary capabilities in-house, spurring them to acquire other companies. They will get better at identifying and integrating targets. Meanwhile, incumbent companies in mature markets may become increasingly open to M&A transactions with RDE peers. Banks and private equity firms will increasingly act as matchmakers. 1 Where They Are Growing: Next Door and Around the World Looking at the markets that our RDE 100 are targeting for expansion, we found that the decision whether to test the waters in other emerging markets first or to go directly for the large developed markets is closely related to industry and business model. (See Exhibit 7.) 1. See s Global Challengers: The Strategic Implications of Chinese Outbound M&A, BCG report, May EXHIBIT 7 TARGET REGIONS FOR EXPANSION ARE RELATED TO INDUSTRY Initial target for expansion Percentage of industry expansion into each type of market Mass markets in developed countries Niche markets in developed countries Telecommunications electronics Consumer services Selected examples Food and beverages SOURCES: BCG RDE Challengers Database; BCG analysis Other emerging markets Home appliances 100 Engineered products 18 BCG REPORT